What’s A Millionaire? The Levels of Millionaires Explained

levels-of-millionaire-this-man-is-a-millionaire

Disclaimer: The statements made in this post are the opinion of the author. They should not be viewed as financial advice. Please consult with a financial specialist before making any financial decisions.
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The word “Millionaire” probably conjures up images in your head of extreme wealth like Scrouge McDuck swimming in his pile of money. That’s certainly what the media shows when they say millionaire.

And they couldn’t be more wrong.

In High School, I had a technology teacher who was in on the ground level with Google. If he was in on the ground level with Google you might be wondering why he was teaching at my High School.

Well, as Google shot up his net worth increased rapidly and suddenly he was a millionaire.

Having a million dollars in his bank account made him feel invincible. He could do anything, right? So he quit his job and went into early retirement.

It didn’t last. After spending his fortune he went back to work as a teacher.

Or at least, that’s how he tells the story.

So why wasn’t he able to retire forever? I mean he was a millionaire!

Well, as it turns out there are levels to millionaires and most millionaires don’t act like you and I assume they should.

If my teacher had acted like a true millionaire, he would still be one.

What Is The Definition of a Millionaire?

Dictionary.com defines a millionaire as “a person whose wealth amounts to a million or more in some unit of currency, as dollars.”

I like this definition because it has nuance to it.

The Google “define millionaire” definition states a millionaire is “a person whose assets are worth one million dollars or more.”

This definition is inaccurate, and I’ll explain why.

What Does it Mean to be a Millionaire?

For someone to be a real millionaire they have to be able to, hypothetically, have access to $1,000,000 of their own dollars.

This can be $1,000,000 in their bank account, or $1,000,000 if they sold everything they had and paid off all of their debts, but it has to be $1,000,000 of their own money.

Google’s definition would allow for anyone who “owns” a million dollar house to be a millionaire, since their asset is worth that much, even if they owed the bank $999,999.

So we’ll stick with the dicitonary.com definition since having one million available in currency of some kind is a true millionaire.

Levels of a Millionaire

Being a millionaire is often viewed as the threshold a person has to reach to become “rich”. In fact, dictionary.com gave a second definition for millionaire as “any very rich person”.

But it is important to realize that there are people who are rich who don’t have $1,000,000 yet, and there are people who are poor that have $1,000,000 in their bank right now.

So first, we need to put people into two categories. All-spenders and Less-spenders.

All-spenders are people who spend every single dollar that they bring in (and sometimes more). They might have money in their bank account since they make a lot of money, but each dollar is spoken for with an upcoming payment, a new toy their eyeing, or most likely credit card debt.

An All-spender can have a lot of money but still be very poor because if they ever lost their source of income they’d be out on the streets.

A Less-spender is the opposite. They consistently put some of their money away each month, and they do it on purpose. A Less-spender is trying to save, and often invest, to better their lives in the future.

If a Less-spender lost their source of income they will have money in reserve to handle that crisis.

To put it bluntly, an All-spender is poor, even if they don’t look like it, and a Less-spender is rich, even if they aren’t there yet.

My teacher didn’t stay a millionaire because after making his million he was an All-spender and it easily slipped through his fingers.

So if you have $1,000,000 but you’re an All-spender, you aren’t really a millionaire because your money is spoken for by your habits of consumption.

So we need to understand that there are fake millionaires and real millionaires, and there are different kinds or levels of millionaires. Here are the levels I was able to detect.

Millionaire Level 1: Future Millionaire

Now according to our dicitonary.com definition, this person isn’t a millionaire officially. But, I would argue that if someone is on track to have and keep $1,000,000 they deserve to be in the same category as millionaires.

Basically, if you’re assets will keep growing until you have $1,000,000 in the near future whether you do anything or not you’re a millionaire, you just have to wait for the numbers to catch up.

This level is the hardest part of becoming a millionaire because it usually lasts a long time as a Less-spender slowly builds their fortune over years.

Millionaire Level 2: Asset Millionaire

An asset millionaire is someone who, if they had to sell everything and pay off any debts they have (like a mortgage), would have $1,000,000 left over (before tax usually).

This is how most people get into the millionaire category. They own a home which is worth a significant amount. And they own retirement accounts as well as a few other investments which together are worth $1,000,000.

The problem with this level of millionaire is it isn’t very useful. You need a place to live, so you probably can’t access the money in your house. If you aren’t 65 the money in retirement accounts aren’t helpful.

So while you’re a millionaire and significantly better off than most people you don’t have the means to flaunt it (though you probably don’t even want to).

Millionaire Level 3: Liquid Millionaire

Liquidity is a term used to describe money that you can access very easily. For example cash in your bank is very liquid while equity in your home is not.

So the difference between an asset millionaire and a liquid millionaire is how fast they can access that cash.

A liquid millionaire could have $1,000,000 on hand within a week (not an easy feat if you have to sell a house or luxury car to get $1,000,000).

This can include someone who’s stocks are worth $1,000,000 since stocks are relatively liquid.

The biggest problem with being a liquid millionaire is that to get $1,000,000 you’ll probably be hit with taxes and fees from getting that money into liquid form quickly.

But once again, a liquid millionaire has a stronger financial position so they are better off than an asset millionaire.

Millionaire Level 4: Cashflow Millionaire

Cash flow is money that your assets pay out to you on a regular basis. So to become a Cashflow millionaire you would need assets that pay out $1,000,000 in a year.

This can be in the form of dividends, which would require a TON of money invested, royalties for a creative work you’ve made, profits from a business you own, or rents from real estate.

Very few people will become cashflow millionaires because it takes a lot of work to build a business or portfolio to that size.

Millionaire Level 5: On Hand Millionaire

An on hand millionaire is basically all of the above. To be an on hand millionaire you would need to be able to spend $1,000,000 on anything and have it not significantly impact your net worth and/or your daily life.

This does not include hot shot professional ball players or up and coming movie stars who can spend a $1,000,000 because they have it in their bank account.

Those people are future non-millionaires.

You have to have the assets in place to replace your $1,000,000 to be in this class.

These are the smart investor, super rich like Shaq (he has been very smart with his money). They are usually people who have created a successful business or through personal skill have made millions of dollars and instead of spending it all they invest it for the future so they never have to worry about money again.

Once you’ve reach this point there is really no where else to go. You’ve made it.

Is a Million Dollars a Lot of Money?

So now that you understand the levels of millionaires, the question is who cares? Is $1,000,000 even worth it? As an asset, having $1,000,000 is a general baseline for being wealthy.

That doesn’t mean you need to have $1,000,000 to be well off, but if you can accumulate $1,000,000 you can probably sustain your live indefinitely with investments.

In fact, according to the 4% rule you could withdraw $40,000 a year from $1,000,000 worth of investments and most likely never run out of money!

For more information on the 4% rule check this out.

The reason that the 4% rule works is because $1,000,000 has a huge potential return on investment. The more money you put in the more money you’re likely to get back.

If you want to know just how big that potential is for $1,000,000 check out How Much Interest Do You Get On One Million Dollars?

Related: What is a Good Return on Investment?

How Do Most Millionaires Become Millionaires?

So being a millionaire sounds great, but how do you become one?

Nope, it isn’t be winning the lottery. While that would help, it isn’t likely, so it really isn’t worth counting on.

Nor is it from inheriting a lot of money. You don’t have a long lost rich uncle, so move on from that fantasy.

Instead there are three things ANYBODY can do to become a millionaire.

  1. Earn more money. I know that isn’t a surprise, but every step you take up on your paycheck is one step closer to having the money to become a millionaire.
  2. Spend less money. If you make $200,000 and spend $200,000 you are poor. But if you make $60,000 and spend $30,000 you will be rich. Guaranteed. The less you spend allows you to grow your wealth towards a million.
  3. Invest the difference. Let’s say you make $60,000, spend $30,000 and invest the other $30,000 each year. You will have $1,000,000 in 19 years (assuming a 6% return, which is actually low, with the more historical 10% it will only take 15 years). Try this calculator.

Between investing the money you don’t spend, growing equity in your home, and a few other wise choices, anybody can become a millionaire.

Are you a All-spender or a Less-spender? How would having $1,000,000 invested change your life? Tell me about it in the comments below.

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Definitions

A list of definitions used on this blog can be found here.

4% Rule: A rule of thumb–if you pull out 4% of your total investments each year of retirement then you won’t run out of money over a 30 year long retirement. For example, if you have $1,000,000 invested you can pull out $40,000 in a year.

Return on Investment: How much money you get back, usually measured yearly, on the money you invest in something. For example, if you invest $1,000 and receive $100 back from that in the course of a year then you’ve had a 10% return on investment.

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